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Merck’s Global Banking Makeover

Merck’s effort to standardize its cash management and payments worldwide by implementing a single global banking interface has produced many benefits, says Mark McDonough, treasurer and vice president at the $48 billion pharmaceutical company. But he acknowledges that the process was not easy.

Before New Jersey-based Merck implemented the global banking strategy, the company’s “transactional banking activities [were] very much geared to local market needs and local market banking processes,” McDonough says. Advances in technology, as well as Merck’s move to a standard global ERP platform and shared-services environment, paved the way for deploying a single payments file format worldwide, an effort that Merck’s treasury began to roll out in 2008.

“What we have done is say to our banks, ‘We will give to you a single payments file,’ and the format of that payments file is standard around the world,” McDonough says. “It can support several types of payments, but it’s a standard interface around the world. We present the same interface to our banking partners in Asia-Pacific and to our banking partners in Europe as we do in North America.”

One early challenge “was understanding how complex that interface was going to need to be,” he says. “We wanted to make sure we met local banking system needs, but not necessarily cater to all of the different transactions we could have had.”

Merck also uses a standard format to receive collections. The global banking strategy employs the ISO 20022 messaging format and relies on SWIFT.

In Europe, Merck’s payments comply with the provisions of the Single Euro Payments Area (SEPA). The company has yet to adopt SEPA direct debits, but McDonough says it plans to do so by the February 2014 deadline.

Converting Merck’s standing data, such as historical data and information on its vendors and customers and their bank accounts, and insuring that it meets the new ISO standards, has probably been "the biggest challenge," McDonough says.

Asked what advice he would give companies that are considering a similar effort, McDonough says: “It is a fairly significant upfront commitment and investment to move to ISO 20022 and to a global standard interface. You have to be persistent in the beginning.”

But he adds that as Merck’s effort gains “critical mass, we’re beginning to see the benefits—they’re coming through in very large ways now.”

Those benefits include reductions in Merck’s banking fees and costs. “Especially in foreign exchange, we’re able to net out a lot of FX transactions and turn foreign payments into local payments and transactions,” McDonough says. “We also get much greater visibility and the ability to concentrate our cash through the automation involved.”

And Merck’s subsidiaries benefit by being able to cut back on workers employed in supporting banking transactions, since most of those now flow through the company’s banking centers, he says.

Of course, cash management and payments aren’t the only focus for Merck’s treasury. For example, the company increased its dividend this year for the first time since 2004, boosting the payout by 4 cents, or roughly 11%, to 42 cents.

McDonough notes that Merck this year sees its patent expire on its biggest selling drug, asthma medication Singulair. That’s a development that often leads to declining sales, “but we felt confident in the remaining growth drivers of our business,” he says. “We felt like it was time to really think about increasing our dividend because we had increased our returns and cash flow over that time and wanted to express confidence in our ability to bring the company through the Singulair patent expiry.”

Meanwhile, Merck is keeping close watch on Europe’s debt crisis. “We continue to monitor the conditions there and the impact on banks as well as sovereigns,” McDonough says, noting that as a healthcare company, Merck counts sovereign nations as big customers. “So it creates an extra area of concern and focus for us.”

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